Question 6

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 3.00%. The probability distributions of the risky funds are:

Risky Assets	Expected Return	Standard Deviation
Stock Fund (S)	12.00%	41.00%
Bond Fund (B)	5.00%	30.00%

The correlation between the fund returns is 0.0667.

Suppose now that your portfolio must yield an expected return of 9.00% and be efficient, that is, on the best feasible CAL. (Do not round intermediate calculations. Round your answers to 2 decimal places and put it in the following format XX.XX.)

Part A: What is the standard deviation of your portfolio?

Standard Deviation (%) = _________%

Part B: What portion of the complete portfolio is invested in the T-bill fund?

Percentage of Complete Portfolio Invested in the T-bill Fund (%) = _______%

Part C: What is the proportion invested in each of the two risky funds?

Percentage of Portfolio Invested in the Stock Fund (S) (%) = _______%

Percentage of Portfolio Invested in the Bond Fund (B) (%) = _______%